Bank refusals push SMEs to expensive mobile loans

Small and medium enterprises (SMEs) are relying on mobile loans for funding more than ever before as banks shun credit issuance to the micro-business.

The data contained in the 2019 Kenya SME Performance Index by Viffa Consult which features the survey of 200 businesses places mobile money as the second primary source of business financing at 22 percent behind only retained earnings.

At the same time, mobile money is established as the top principal financial partner for SMEs at 33 percent to equal the combined contribution of banks, chamas and family and friends.

Year after year, mobile money deployment has grown faster than any other channel to mirror the increased role of the digitization of financial services.

The index attributes the increased reliance on business loans to the long freeze of private sector credit via the stay of the interest capping law where banks de-risked out of the sector to mitigate perceived higher risks.

“The interest rate cap has been the game changer having resulted in the denial of bank loans to SMEs. The financing of business from retained earnings was not just enough under the current operating environment,” noted Viffa Consult Managing Director Victor Agolla.

Mobile money as a source of business is expected to grow in prominence to eclipse earned profits irrespective of the lifting of interest rate caps which are in the long-term expected to free up credit flow to the sector.

Nevertheless, while mobile loans have attracted a higher annualized interest charge to border the exploitation of borrowers, Mr. Agolla appraises the source of funding for its ease of access in comparison to banking sector loans.

“Interest rates charged on mobile loans are definitely higher, but what is the other option to expanding your business?” he posed.

SMEs represented the high growth in employment creation having scooped 83.6 percent of the 846,000 jobs created across 2018 as per provisional data from the Kenya National Bureau of Statistics (KEBS).

Even so, the business have taken a slump from the continued stay of a depressive operating environment which has seen hundreds of workers laid off from firms under bearish market conditions.

The slump is mirrored in the index’s tracking of the enterprises reclining turnovers’ over the review period.

Annual turnovers of between Ksh.500,000 and Ksh.1,000,000 and those from Ksh.1,000,001 to Ksh.5 million declined by a respective four percent even as the return of amounts less than Ksh.500,000 increased by 18 percent in the period.

Further, the return of medium enterprises represented by the guidance of between Ksh.5000,001 and Ksh.10,000,000 was up by three percent but only after a 30 percent dip in returns ranging between Ksh.10,000,001 and Ksh.30 million by larger enterprises.

Local SMEs expects for a better run in the New Year buoyed in large part by new reforms including the recent lift on lending by commercial banks and the development of innovative financing products.

Among the top aspiration by the enterprises in 2020 includes the access of new markets and expansion.

However the index expresses caution in the ongoing fiscal consolidation efforts by government which glooms government spending in the economy.

“This is easier said than done due to underlying risks such as expenditure rationalization without affecting productivity of critical services including non-payments to SMEs’,” notes the index in part.